In a few days the world's biggest sporting event, the World Cup, will begin in South Africa. In addition to being an immensely popular spectator sporting event, the World Cup is also a very popular gambling event. The Wall Street Journal speculates that the 2010 World Cup will be the largest betting event in history and reports that between one and three billion pounds sterling could be wagered in the UK alone. Since much of the World Cup betting involves office pools and informal bets among individuals, it is impossible to estimate the actual amount of money wagered, but it is sure to be substantial.
Two institutional characteristics of football betting make World Cup betting interesting from an economic perspective. First, most football betting takes the form of fixed odds betting on three outcomes (home team win, draw, visiting team win). The low scores of football matches make point spread betting impractical. Second, unlike in North America, in much of the rest of the world sports betting is legal and easily available to fans and punters. There is a betting shop on nearly every corner of every city in the UK, and on much of the continent governments sponsor sports betting operations. On-line betting is also easily available and quasi-legal in the EU and other countries.
The combination of fixed odds betting, easy access to domestic sports books, and the large number of "sentiment" bettors who only want to bet on their national team to win World Cup matches leads to a lot of risk for domestic book makers. For example, consider the World Cup betting action in the UK, where getting a bet down on a World Cup match is extremely easy. The World Cup attracts a lot of casual bettors who want to put a few pounds in England to win a match, or the entire tournament. This leads to large imbalances in betting volume, as most of the money is bet on England to win. Recent media reports point out the unbalanced betting volume in the UK, where a large number of wins by England could cost bookmakers a lot of money. One solution to this problem is for book makers to insure against this outcome by "laying off" (placing offsetting bets on England to lose or a draw with other book makers. Transactions costs, in the form of "over round" and, for UK book makers in the form of currency exchange costs (if every book maker in the UK has an unbalanced book on England to win matches, then any lay off bet would have to be made internationally), may keep book makers from insuring. There is little evidence that book makers in the US ensure against losses due to betting imbalances; how much book makers lay off, and why they don't appear to exercise this option very often, is an interesting and open research question at this point.
Another option open to domestic book makers faced with unbalanced betting on international football matches is to "shade" the odds by systematically offering worse odds on the national team to win that would be expected based on the strength of the national team. Economists have taken notice of this phenomena, and a few papers examining odds or point spread shading have been written. A recent working paper by two German economists examined patterns in domestic betting on matches in the 2008 UEFA European championship qualifying and tournament. They found evidence of systematic odds shading by domestic book makers in Italy, France, Spain, Slovenia, Denmark and Bulgaria. I recently published a paper containing evidence of a similar phenomena in betting on NBA games.
England are a heavy favorite in their opening match against the US on Saturday. A win for England in that match may mean a loss for many UK book makers.